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I will weigh in also on this excellent subject.
Super's comment on the time required to become profitable if you wish to
earn a living is right on! I would definately agree that it takes 3-5 years
to do so. Depending on the individual and the type of trading he/she does,
it will take more or less. For some it could take 5-7 years. And I
heartily agree that the time is probably measured in hours. I would say it
takes 10,000 to 15,000 hours of study, testing, reading, and face time with
the charts to get there. That's why hobbyists can not earn a living. They
can make a little here and there, but not a living. You don't get to be a
surgeon by reading a couple of books.
On computers. Computers and software are both a blessing and a curse. They
are a blessing in that one can test ideas very rapidly. They are a curse
that it is too easy to believe what you test and model. They are a curse in
that people tend to rely on the indicators, mechanical systems, etc and
never learn about what really makes price move, or what the bars are telling
you. Don't use many indicators. Many people have 5,6,7 or more
indicators. All that does is confuse you and paralyze you. Take them all
off and learn to read price and volume, supply demand, patterns, etc
directly from the chart. Use indicators as "reminders" or flags that tell
you a certain thing is happening. It is this study of prices that takes so
long to learn. Use the computer to test your own ideas that you may have
from price behavior, not just to generate buy/sell signals from someone
else's indicator. Make your own indicators and helpers that are fit to your
own style.
It is amazing how many of the people that invented and wrote about
indicators don't ever trade. Here is an interesting story. We have a
monthly technical analysis meeting here in Dallas. A few months ago Woodie
of Woodie's CCI Club fame spoke. He uses the CCI to trade and has taken
that indicator and really learned it inside and out. He said that he met
the inventor of it, and the guy said it was not invented to trade with. The
guy was a computer programmer charged with building a test suite for a new
computer. He invented the CCI to test a computer, not because he thought it
might help him make money from trading. The fact that the CCI can give you
insight into trading turns out to be pure random luck!
Have markets become easier or more difficult to trade? Well, depends on the
market. As to the US stock market, they are more difficult now than a few
years ago. Everyone is aware of the price bubble that burst in 2000. But
there was a volatility bubble also and it did not burst until 2001.
Volatility has been contracting ever since, regressing to the mean.
Unfortunately it probably has further to shrink to get back to the mean.
Making profits from trading requires volatility. Systems that require high
volatility won't work in this environment. In a low volatility environment
you have to change your approach. We were all geniuses in 1999. When you
have a strong bull market with rising volatility, any idiot, (myself
included) can make money. A rising tide lifts all ships and all you had to
do is buy something and you made money. Times have changed. What worked
then, doesn't work now and won't in the future.
Enough for today.
----- Original Message -----
From: "superfragalist" <no_reply@xxxxxxxxxxxxxxx>
To: <equismetastock@xxxxxxxxxxxxxxx>
Sent: Monday, May 09, 2005 1:24 PM
Subject: [EquisMetaStock Group] Re: optimize--MG's question
> No question these are matters of style and strategy. I took a
> different approach to trading before I started doing it for a living.
>
> When I had other sources of income I wasn't nearly as conservative and
> of course, I wasn't as consistent either. I didn't need to be because
> I could easily pay the bills and replace any money that I lost.
>
> The information in my posts is not suppose to be taken as a matter of
> fact, but only as a look at what someone else is doing. Nothing in my
> posts say that these methods are the right way, the only way or the
> preferred way to trade. Hardly.
>
> I was reading a trading book this weekend in Barnes&Noble. I can't
> remember the name of it. (I'll look later, and get another piece of
> cheesecake while I'm down there.) In the first chapter, it said that
> it takes someone 3 to 5 years to learn to trade well enough to make a
> living at it, and it's going to cost them $50,000 to $100,000 in
> tuition money to reach that point.
>
> I agree with that statement except I would have added 3 to 5 years
> working at it at least 4 to 8 hours a day. I've often said that
> getting an MBA from Harvard is cheaper, and that it takes less time
> and less work. (I've already explained in previous posts how nearly
> anyone with a high school diploma can get into Harvard, so getting in
> is not an excuse.)
>
> For most people on here, trading is a hobby. That's a whole different
> topic, and it should be approached from a different perspective.
>
> A lot of people dabble with trading for a couple of years, have some
> modest success and then decide to jump into it full time. Big mistake.
>
> Another thing that attracts too many people to trading is the gambling
> aspect of it. They want to make a big hit, get rich quick or whatever.
>
> That's why they don't want to consider the Harvard approach. That
> looks like work.
>
> The point is that if someone is going to achieve wealth at all, it is
> going to be built slowly. Sure there are exceptions. There are about
> as many exceptions to that as there are janitors that have won the
> lottery. So if you want to build wealth quickly and easily, buy
> lottery tickets and be one of the janitor exceptions. It takes a lot
> less time and energy than trying to do the same thing trading.
>
> In hindsight, if I had it do all over again, I wouldn't have gotten
> into trading, I would have applied the techniques from the The Four
> Pillars of Investing and used a buy and hold strategy with the correct
> asset allocation. I'm not saying I would have skipped trading because
> I didn't make more money from trading than from buy and hold---(the
> majority of people don't make more, especially after tax)--I'm saying
> that because I underestimated the amount of time it was going to take
> me to achieve those results.
>
> On an after tax basis, I'm ahead of the the buy and hold strategy but
> for me, I didn't make enough extra money to make it worth the time.
> It's a question of thresholds. My question is "am I going to make
> enough money to change my life in meaningful ways as compared to the
> time it takes to do it?"
>
> I enjoy the intellectual aspects of trading, no question, but I would
> have also enjoyed spending time with my other interests, which have
> been neglected because of the time I spend trading. If all I had to
> keep me busy was watching the Oprah show, that's a different issue.
>
> The one good thing, outside of income, that has come from my
> investment of the time in learning to trade is I feel I could make
> money under any economic conditions. That's a good thing.
>
> The smell of money is a powerful seducer. It can make you do all kinds
> of things you shouldn't be doing. Be careful when the smell waffs into
> the room.
>
>
>
>
>
> --- In equismetastock@xxxxxxxxxxxxxxx, mgf_za_1999 <no_reply@xxxx> wrote:
>> First of all, thank you super for taking the time to answer.
>> Specifically, regarding your previous posts as well, thanks for not
>> shunning detail but really giving something to chew on. Again, it
>> will take time to digest all of this and will greatly add to my
>> arsenal of market weapons if you want.
>>
>> Look, I don't trade for a living. I'm part of a team that builds
>> models for a living, a lot of them for financial markets. I once saw,
>> in 1996, a trading firm make in one day, while we train them in using
>> a model built for them during the previous three months, and using
>> this model, more money than our whole consultation fee for that
>> period. Since then I've been more active in the market - sometimes on
>> a full time basis - after having traded only a little bit before. I
>> had to figure out answers to these types of questions with very little
>> experience and very little guidance and access to a forum like this
>> would have helped me quite a bit.
>>
>> Obviously these questions are not directly related to building
>> technical trading models - as you observe - they are style related
>> questions. If this bothers anybody, super in particular, he does not
>> have to answer them and I'm prepared to live with that - style is
>> quite a personal issue. But I've learned to ask these kind of
>> questions and to value the answers from experienced people. But I
>> trust super's answers were neither forced, nor off topic and I believe
>> they deal with issues relevant to this group.
>>
>> Regards
>> MG Ferreira
>> TsaTsa EOD Programmer and trading model builder
>> http://www.ferra4models.com
>> http://fun.ferra4models.com
>>
>>
>>
>>
>>
>>
>>
>> --- In equismetastock@xxxxxxxxxxxxxxx, "dr.torque" <drtorque@xxxx>
> wrote:
>> > dear mg,
>> >
>> > would you also reply the same questions that you asked?
>> >
>> > personally, i believe that these questions being 100% dependent on
>> the style
>> > of your trading -the answers would not fit any average trader- it is
>> also as
>> > dependent on the market you are trading. i doubt the technical
>> knowledge of
>> > anyone trying the very same indicator to any two markets without
>> changing
>> > the parameters.
>> >
>> > by these questions are you trying to analyze "a" winner's trading
>> style, or
>> > just looking for a point to critisize a "winner's" style?
>> > anyways, both lacks a point i believe..
>> >
>> > torque
>> >
>> > -----Original Message-----
>> > From: equismetastock@xxxxxxxxxxxxxxx
>> [mailto:equismetastock@xxxxxxxxxxxxxxx]
>> > On Behalf Of mgf_za_1999
>> > Sent: Monday, May 09, 2005 2:10 AM
>> > To: equismetastock@xxxxxxxxxxxxxxx
>> > Subject: [EquisMetaStock Group] Re: optimize--MG's question
>> >
>> >
>> > Hi superfragalist,
>> >
>> > I am still working through this, chewing on the many interesting bits
>> > and pieces in here. Some things I don't agree with, some I would
>> > change but for the most part, this is very informative, very good and
>> > well worth applying in trading. The one thing I would want to
>> > recommend is that you be less biased towards long and equally prone to
>> > keeping short positions! With that out of the way, I most of all
>> > appreciate the fact, pointed out here, that this is what you do for a
>> > living! Now, really as a matter of interest, but also to get some
>> > practical guidance, could you please ellaborate on the following
> points:
>> >
>> > - Do you think markets have become easier or more difficult to trade?
>> > Given the 'online', real time environment we operate in coupled with
>> > powerful software such as Metastock, trading should be easier. But is
>> > this offset by an increase in volatility? Or whatever?
>> >
>> > - How much time do you spend analysing the markets. Is it a 24/7
>> > thing, two hours a week, one day a month? Do you spend more time when
>> > you make/loose money, in up- or downtrends or at say month end.
>> >
>> > - How long do you keep a position? Of course, 'it depends', but I
>> > once talked to a trader, I guess in a similar situation as you, who
>> > would be very uncomfortable to keep something for more than say two or
>> > three days. He knew this and easily shared it. So if you have
>> > something there, let us know.
>> >
>> > Thanks a lot for your inputs.
>> >
>> > Regards
>> > MG Ferreira
>> > TsaTsa EOD Programmer and trading model builder
>> > http://www.ferra4models.com
>> > http://fun.ferra4models.com
>> >
>> >
>> > --- In equismetastock@xxxxxxxxxxxxxxx, superfragalist <no_reply@xxxx>
>> > wrote:
>> > > Good afternoon, MG. Your questions are interesting ones as usual.
>> > >
>> > > Because of your major contributions to the forum, your
> background and
>> > > your experience, I would like to respond to all of your
> questions with
>> > > a reasonable amount of detail, which would probably provide more
>> > > energy for further discussions that might benefit others as well as
>> > > ourselves. However, I am somewhat limited in my detail as a
> result of
>> > > having to respect Roy's newsletter and the people who pay a very
>> > > modest fee to subscribe.
>> > >
>> > > I agree that subjectivity in a trading system is a tricky subject.
>> > > I've always believed that a mechanical system is highly unlikely
> to be
>> > > traded as a strict mechanical system when that system is in the
> hands
>> > > of an individual. It's very difficult to remove judgement or emotion
>> > > from someone who is not only executing the system but tracking it's
>> > > performance with their personal funds. Anyone who has the iron will
>> > > and stomach to stick strictly to a mechanical system as the
> drawdowns
>> > > grow, is someone who has the discipline to trade without such a
>> > > system. I think various research projects by Future's Truth Magazine
>> > > has shown this to probably be true.
>> > >
>> > > On the other hand, mechanical systems make sense for money managers
>> > > with larger amounts of capital and staff resources. The corporate
>> > > structure is usually diversified, disciplined and monitored
>> > > sufficiently to get the best from a mechanical system.
>> > >
>> > > For me, I feel the human mind is the fastest, most flexible CPU
> there
>> > > is and I don't want to remove it from my decision making even though
>> > > sometimes the human CPU can be significantly disrupted by all
> kinds of
>> > > events. Unfortunately, I don't see Kalman filters as an indicator of
>> > > how much I should train my neural nets. Everyone in my family thinks
>> > > they're in charge of that task.
>> > >
>> > > In my trading, I look for four kinds of markets: uptrends,
> downtrends,
>> > > consolidation with leadership in tact and consolidation with
> rotation.
>> > > Consolidation includes sideways markets, normal pullbacks and
> various
>> > > other gyrations that aren't trends.
>> > >
>> > > Regardless of the market conditions, I use the same methods for
>> > > finding my prossible trades. Mine is a combination of TA, quants and
>> > > fundementals along with a pure TA exploration that is very
> effective.
>> > > I don't vary that technique because I haven't found a method that
>> > > produces a better pool of candidates.
>> > >
>> > > The size of the pool of candidates changes as market conditions
>> > > change. In an uptrend, I'll find 50 to 100 trades that look
>> > > reasonable. I have a set of chart rules that I use to evaluate which
>> > > of those candidates I'm willing to take a risk on. My chart rules
>> > > don't change according to market conditions, either.
>> > >
>> > > In a consolidating market with leadership in tact, the pool of
>> > > candidates might shrink to less than half as many as when the
> uptrend
>> > > is clearly visable. Obviously downtrends stop my long trading
> and I go
>> > > short. Markets consolidating with rotation, or alternatively
> that are
>> > > directionless, calls for no trading, or very, very short holding
>> > periods.
>> > >
>> > > How much subjectivity is there in the chart rules? I would say that
>> > > there is little flexibility and subjectivity in creating the pool of
>> > > candidats, but somewhere in the area of 40% in the evaluation of a
>> > > chart as to which of those possible trades to take.
>> > >
>> > > I've used systems testing to create the part of my system that
> selects
>> > > stocks for inclusion in the pool. I've tested that system in all
> four
>> > > market conditions and I know the trade statistics that are likely to
>> > > occur in each case. I've developed a method for figuring out which
>> > > market condition exists, and I have a pretty good idea of what to
>> > > expect from the pool based on how I see the market at that moment.
>> > >
>> > > However, when the 40% (plus or minus of course) subjectivity comes
>> > > into the final selection of which stocks to buy, then the systems
>> > > tests are of little value. I've figured out those trading statistics
>> > > by analyzing the final trading results. This gives me feedback
> on how
>> > > my chart reading rules are working.
>> > >
>> > > I have a standard chart template I use to look at stocks. I only
> use a
>> > > couple of indicators to confirm what I think I'm seeing. While I
> don't
>> > > use the indicators as a reason to buy, I sometimes use them as a
>> > > reason not to buy. I'm mostly looking at price volume action,
> with the
>> > > indicators as a back stop in case I'm reading that wrong.
>> > >
>> > > In addition, to the total number of stocks that look like good
> trades
>> > > changing according to market conditions, my rules for size,
> exits and
>> > > stops change also.
>> > >
>> > > If the market is in an uptrend like it was in Nov and Dec of 2005, I
>> > > use longer MA's, loser stops and less rigorous exits. In January I
>> > > tightened the stops and exits and shortened the MAs. In April I
> didn't
>> > > trade. My holding periods change accordingly as you would expect.
>> > >
>> > > I'm mostly a long only trader. I do short the indexes when I see a
>> > > downtrend, but I'm even more conservative in my shorting. With
>> > > commissions so low and execution times so high, there's little
>> > > economic reason not to be conservative when it so cheap to buy
> back in
>> > > if you're stopped out too early. It takes some degree of
> discipline to
>> > > go back to a trade after being stopped out, but my number one
> rule is
>> > > don't lose money.
>> > >
>> > > I have to live strictly off of the returns on my capital account so
>> > > preservation of my capital account is a rule with zero
> subjectivity.
>> > >
>> > > A lot of people want to automate the chart reading criteria that
> I use
>> > > to narrow my lists of trades among the choices I have. I don't think
>> > > that works very well because the subjective evaluation is
> necessary to
>> > > respond to different market conditions and to consider all of the
>> > > variables and their constraints.
>> > >
>> > > If you read Roy's newsletter you will see how Pareto's principle and
>> > > my education in the mathematics of operations research has shapped
>> > > what I do. I have an explanation in there about why I don't believe
>> > > maximization or minimization despite the high usage of these
>> > > principles in econometrics and production management. (Even an
>> > > excellent, expert, programmer such as yourself would find some
>> > > interesting and new things in there. I do and have increased my code
>> > > library a lot because of it. You would even get a few new systems
>> > > develop ideas out of it.)
>> > >
>> > > I don't optimize much using the systems tester. As I said in my
> other
>> > > post I optimize mostly to evaluate robustness. I use the systems
>> > > tester as a relative comparison and to figure out how much the
> trading
>> > > statistics change from one market condition to another.
>> > >
>> > > When I do optimize I optimize the sytem to perform the best in
>> > > uptrends, and then I add rules to restrict it's ability to trade in
>> > > other market conditions.
>> > >
>> > > I do not feel that optimizing or testing across a wide range of
> market
>> > > conditions as a means of optimization is a good idea. I do test
> across
>> > > several years to look at overall systems performance, but I also
> test
>> > > year by year to correlate the performance with the market
> conditions.
>> > > I also test on various subsets of the universe of stocks. I use in
>> > > sample and out of sample data, especially when I want to
> evaluate the
>> > > performance of the system in a particular market type, or to
> determine
>> > > the effectiveness of my filters at preventing trading when the
> trading
>> > > statistics for that market condition are below my acceptable
>> > thresholds.
>> > >
>> > > I see trading as more about strategy than about indicators so I
> don't
>> > > waste a lot of time with indicators. Trading to me is the management
>> > > of probabilities. Unfortunately the mathematics of probability
> is one
>> > > of the hardest math techniques for people to understand. Too many
>> > > people assume they understand probability because they can get a
> feel
>> > > for a one in ten chance or 40% losers and 60% winners. To me, that's
>> > > not probability, it's performance statistics.
>> > >
>> > > As you know, probability is understanding independent events and
>> > > dependent events and how to determine the possibility of different
>> > > combinations occuring.
>> > >
>> > > Well, this is a long post so I won't go into any more detail. The
>> > > detail and code is in Roy's newsletter, but I hope that this
> much of a
>> > > discussion has at least been worth the time it takes to read it.
>> > >
>> > > This stuff works for me. Obviously there are thousands of ways to
>> > > trade. I've looked at as many of them as I could, and what I do
> is the
>> > > best fit for me, and it produces great results on my scale of
> results
>> > > measurements. My three primary requirements are: don't lose money,
>> > > consistency is more important than big numbers, and make enough
> to pay
>> > > the bills and increase my capital account to offset inflation
> and any
>> > > slips in rule number one.
>> > >
>> > > Thanks again for your contributions. While a lot of them are way
> over
>> > > my head, I'm sure many people appreciate the time and effort it
> takes
>> > > to post them.
>> >
>> >
>> >
>> >
>> >
>> >
>> > _____
>> >
>> > Yahoo! Groups Links
>> >
>> >
>> > * To visit your group on the web, go to:
>> > http://groups.yahoo.com/group/equismetastock/
>> >
>> >
>> > * To unsubscribe from this group, send an email to:
>> > equismetastock-unsubscribe@xxxxxxxxxxxxxxx
>> >
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>> >
>> >
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